The Second Circuit issued a stay of trial court's decision in SEC v. Citigroup, the case that where the court rejected a $285 million settlement between the SEC and Citigroup. The appellate court found that the SEC had "shown a likelihood of success", a finding that was not an express decision on the merits. The opinion is here.
Although disclaiming any view on the merits, it is clear from the analysis that Second Circuit will overturn the trial court's decision. That is no surprise. The trial court's decision was too broad to be left in tact.
The surprising part is that in remanding the case (as the Second Circuit surely will do when it addresses the merits), the Second Circuit is likely to significantly constrain the trial court's ability to reject this or any settlement submitted by the SEC. Thus, for example, in granting the stay, the court emphasized the need to give the SEC's decision to settle considerable deference.
- A still more significant problem is that the court does not appear to have given deference to the S.E.C.’s judgment on wholly discretionary matters of policy. The S.E.C.’s decision to settle with Citigroup was driven by considerations of governmental policy as to the public interest. The district court believed it was a bad policy, which disserved the public interest, for the S.E.C. to allow Citigroup to settle on terms that did not establish its liability. It is not, however, the proper function of federal courts to dictate policy to executive administrative agencies. . . . While we are not certain we would go so far as to hold that under no circumstances may courts review an agency decision to settle, the scope of a court’s authority to second-guess an agency’s discretionary and policy-based decision to settle is at best minimal.
The panel went on to note that "there is no indication in the record that the court in fact gave deference to the S.E.C.’s judgment on any of these questions." As the court reasoned:
- The S.E.C. believed, for example, that the public interest was served by the defendant’s disgorgement of $285 million, available for compensation of claimants against Citigroup, plus other concessions. The court simply disagreed. In concluding that the settlement was not in the public interest, the court took the view that Citigroup’s penalty was “pocket change” and the S.E.C. got nothing from the settlement but “a quick headline.” Id. at *5.3 In addition, the court does not appear to have considered the agency’s discretionary assessment of its prospects of doing better or worse, or of the optimal allocation of its limited resources. Instead, the district court imposed what it considered to be the best policy to enforce the securities laws. In short, we conclude it is doubtful whether the court gave the obligatory deference to the S.E.C.’s views in deciding that the settlement was not in the public interest.
Thus, courts will need to give considerable deference to the SEC's decision to settle. While the court still has to rule on the merits, this case nonetheless sends a significant message to trial judges in the Second Circuit (and perhaps in other circuits), that their discretion to overturn SEC settlements is quite constrained.
For more primary materials on this case, go to the DU Corporate Governance web site.